DYNASIL CORP OF AMERICA - Quarter Report: 2011 March (Form 10-Q)

Unassociated Document

U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE — ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011

o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE — ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO ______.

Commission file number: 000-27503

DYNASIL CORPORATION OF AMERICA

(Exact name of registrant as specified in its charter)

Delaware	22-1734088
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

44 Hunt Street, Watertown, MA	02472
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (607) 272-3320

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer o Accelerated filer o

Non-accelerated filer o Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes o No x

As of May 16, 2011 there were 15,525,675 shares of common stock, par value $.0005 per share, outstanding.

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

INDEX

	Page
PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2011 AND SEPTEMBER 30, 2010		3

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2011 AND 2010		5

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE SIX MONTHS ENDED MARCH 31, 2011		6

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED MARCH 31, 2011 AND 2010		7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14

Item 3. Quantitative and Qualitative Disclosures About Market Risk		22

Item 4. Controls and Procedures		22

PART II. OTHER INFORMATION		22

Item 6. Exhibits		22

Signatures		23

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

ASSETS
	March 31,		September 30,
	2011		2010
	(unaudited)
Current assets
Cash and cash equivalents	$	4,329,661	$	4,111,966
Accounts receivable, net of allowance for doubtful accounts of $179,240
and $132,584 and sales returns allowance of $77,864 and $24,168
for March 31, 2011 and September 30, 2010, respectively.		7,406,956		6,360,583
Inventories		3,365,411		3,097,219
Costs in excess of billings		-0-		135,157
Prepaid income taxes		223,752		410,045
Prepaid expenses and other current assets		481,401		453,418
Total current assets		15,807,181		14,568,388

Property, Plant and Equipment, net		4,301,926		3,953,319
Other Assets
Intangibles, net		6,372,739		6,671,149
Goodwill		13,146,382		13,591,287
Deferred financing costs, net		170,612		190,568
Total other assets		19,689,733		20,453,004

Total Assets	$	39,798,840	$	38,974,711

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt	$	1,870,029	$	1,870,779
Accounts payable		1,984,110		1,482,250
Accrued expenses and other liabilities		1,686,168		1,823,222
Contingent consideration		279,600		-0-
Billings in excess of costs		558,110		-0-
Deferred tax liability		145,098		91,100
Dividends payable		-0-		131,400
Total current liabilities		6,523,115		5,398,751

Long-term Liabilities
Long-term debt, net		9,904,013		10,833,334
Contingent consideration		-0-		750,000
Total long-term liabilities		9,904,013		11,583,334

The accompanying notes are an integral part of these consolidated financial statements.

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED) (Continued)

LIABILITIES AND STOCKHOLDERS' EQUITY (Continued)

	March 31,			September 30,
	2011			2010
	(unaudited)
Temporary Equity
Redeemable common stock, at redemption value of $2 per share or
$2,000,000; put option on 1,000,000 shares issued and outstanding
March 31, 2011 and September 30, 2010, respectively.	$	2,000,000		$	2,000,000

Stockholders' Equity
Common Stock, $0.0005 par value, 40,000,000 shares authorized,
14,915,835 and 12,482,356 shares issued, 14,105,675 and
and 11,672,196 shares outstanding at March 31, 2011 and
September 30, 2010, respectively.		7,458			6,241
Preferred Stock, $.001 par value, 15,000,000 shares authorized, 0 and
5,256,000 shares issued and outstanding at March 31, 2011
and September 30, 2010, respectively, 10% cumulative, convertible		-0-			5,256
Additional paid in capital		15,861,433			15,186,029
Deferred compensation		(245,713	)		(160,088	)
Accumulated other comprehensive income		288,756			150,162
Retained earnings		6,446,120			5,791,368
		22,358,054			20,978,968
Less 810,160 shares of treasury stock - at cost		(986,342	)		(986,342	)
Total stockholders' equity		21,371,712			19,992,626

Total Liabilities and Stockholders' Equity	$	39,798,840		$	38,974,711

The accompanying notes are an integral part of these consolidated financial statements.

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2011		2010		2011		2010
Net revenue	$	12,116,349	$	10,263,326	$	23,742,856	$	20,200,092
Cost of revenue		7,400,518		6,054,847		14,120,300		12,106,800
Gross profit		4,715,831		4,208,479		9,622,556		8,093,292
Selling, general and administrative expenses		3,898,973		3,099,355		8,069,983		5,912,334
Income from operations		816,858		1,109,124		1,552,573		2,180,958
Interest expense, net		155,157		151,988		313,352		314,429
Income before income taxes		661,701		957,136		1,239,221		1,866,529
Income taxes		265,485		323,836		467,823		619,462
Net income	$	396,216	$	633,300	$	771,398	$	1,247,067

Net Income	$	396,216	$	633,300	$	771,398	$	1,247,067
Foreign currency translation, net of $53,898
and $ -0- income taxes in 2011 and 2010		96,913		-0-		138,594		-0-
Total comprehensive income	$	493,129	$	633,300	$	909,992	$	1,247,067

Net income	$	396,216	$	633,300	$	771,398	$	1,247,067
Dividends on preferred stock		-0-		131,400		116,646		274,633
Net income applicable to common stockholders		396,216		501,900		654,752		972,434
Dividend add back due to preferred stock conversion		-0-		131,400		116,646		274,633
Net income for diluted income per common share	$	396,216	$	633,300	$	771,398	$	1,247,067

Basic net income per common share	$	0.03	$	0.04	$	0.06	$	0.08
Diluted net income per common share	$	0.03	$	0.04	$	0.05	$	0.09

Weighted average shares outstanding
Basic		14,971,874		12,502,365		13,975,906		12,146,499
Diluted		15,507,493		14,839,745		14,511,525		14,483,879

The accompanying notes are an integral part of these consolidated financial statements.

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

																		Accumulated
									Additional			Deferred						Other						Total
	Common	Common		Preferred		Preferred			Paid-in			Stock			Retained			Comprehensive		Treasury Stock				Stockholders'
	Shares	Amount		Shares		Amount			Capital			Compensation			Earnings			Income		Shares	Amount			Equity
Balance, September 30, 2010	12,482,356	$	6,241	5,256,000		$	5,256		$	15,186,029		$	(160,088	)	$	5,791,368		$	150,162	810,160	$	(986,342	)	$	19,992,626
Issuance of shares of common stock under employee stock purchase plan	18,886		10	-0-			-0-			70,484			-0-			-0-			-0-	-0-		-0-			70,494
Issuance of shares of common stock in lieu of compensation to directors	51,783		26	-0-			-0-			245,969			(225,472	)		-0-			-0-	-0-		-0-			20,523
Issuance of shares of common stock in lieu of compensation to directors	-0-		-0-	-0-			-0-			30,878			154,707			-0-			-0-	-0-		-0-			185,585
Issuance of shares of common stock under stock option plan	20,000		10	-0-			-0-			39,990			-0-			-0-			-0-	-0-		-0-			40,000
Compensation costs recognized in connection with employee bonuses	6,441		3	-0-			-0-			27,496			-0-			-0-			-0-	-0-		-0-			27,499
Compensation costs recognized in connection with employment contract	3,000		1	-0-			-0-			14,859			(14,860	)		-0-			-0-	-0-		-0-			-0-
Compensation costs recognized in connection with stock options	-0-		-0-	-0-			-0-			73,358			-0-			-0-			-0-	-0-		-0-			73,358
Issuance of shares of common stock for conversion of Series C preferred stock	2,102,400		1,051	(5,256,000	)		(5,256	)		4,205			-0-			-0-			-0-	-0-		-0-			-0-
Net exercise of options by director	163,661		82	-0-			-0-			(71	)		-0-			-0-			-0-	-0-		-0-			11
Foreign currency translation adjustment net of income taxes	-0-		-0-	-0-			-0-			-0-			-0-			-0-			138,594	-0-		-0-			138,594
Issuance of shares of common stock in lieu of Series C preferred stock dividends	67,308		34	-0-			-0-			168,236			-0-			-0-			-0-	-0-		-0-			168,270
Preferred stock dividends	-0-		-0-	-0-			-0-			-0-			-0-			(116,646	)		-0-	-0-		-0-			(116,646	)
Net income	-0-		-0-	-0-			-0-			-0-			-0-			771,398			-0-	-0-		-0-			771,398
Balance, March 31, 2011	14,915,835	$	7,458	0		$	0		$	15,861,433		$	(245,713	)	$	6,446,120		$	288,756	810,160	$	(986,342	)	$	21,371,712

The accompanying notes are an integral part of these consolidated financial statements.

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended
	March 31,
	2011			2010
Cash flows from operating activities:
Net income	$	771,398		$	1,247,067
Adjustments to reconcile net income to net cash used in operating activities
Stock compensation expense		306,965			120,364
Provision for doubtful accounts and sales returns		22,488			(11,257	)
Depreciation and amortization		642,368			504,644
Deferred income taxes		100			-0-
Net increase (decrease) in billings in excess of costs		693,267			(47,553	)
(Increase) decrease in:
Accounts receivable		(1,068,861	)		(1,038,967	)
Inventories		(268,192	)		235,771
Prepaid expenses and other current assets		(27,760	)		(161,686	)
Increase (decrease) in:
Accounts payable and accrued expenses		233,180			336,107
Income taxes payable		186,293			(174,532	)
Net cash provided by operating activities		1,491,246			1,009,958

Cash flows from investing activities:
Purchases of property, plant and equipment		(698,104	)		(140,955	)
Net cash used in investing activities		(698,104	)		(140,955	)

Cash flows from financing activities
Issuance of common stock		110,505			223,584
Repayment of long term debt		(930,071	)		(1,162,014	)
Preferred stock dividends paid		(79,770	)		(274,633	)
Net cash used in financing activities		(899,336	)		(1,213,063	)

Effect of exchange rates on cash and cash equivalents		323,889			-0-

Net increase (decrease) in cash and cash equivalents		217,695			(344,060	)

Cash and cash equivalents, beginning		4,111,966			3,104,778
Cash and cash equivalents, ending	$	4,329,661		$	2,760,718

The accompanying notes are an integral part of these consolidated financial statements.

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 - Basis of Presentation

The consolidated balance sheet as of September 30, 2010 was audited and appears in the Form 10-K previously filed by the Company. The consolidated balance sheet as of March 31, 2011, the consolidated statements of operations for the three and six months ended March 31, 2011 and 2010, changes in stockholders’ equity and cash flows for the six months ended March 31, 2011 and 2010, and the related information contained in these notes have been prepared by management without audit. In the opinion of management, all adjustments (which include only normal recurring items) necessary to present fairly the financial position, results of operations and cash flows in conformity with generally accepted accounting principles as of March 31, 2011 and for all periods presented have been made. Interim operating results are not necessarily indicative of operating results for a full year.

Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's September 30, 2010 Annual Report on Form 10-K previously filed by the Company with the Securities and Exchange Commission.

Note 2 - Inventories

Inventories are stated at the lower of average cost or market. Cost is determined using the first-in, first-out (FIFO) method. Inventories consist of raw materials, work-in-process and finished goods. The Company evaluates inventory levels and expected usage on a periodic basis and records adjustments for impairments as required.

Inventories consisted of the following:

	March 31, 2011		September 30, 2010
Raw Materials	$	2,354,779	$	2,386,255
Work-in-Process		453,276		416,525
Finished Goods		557,356		294,439
	$	3,365,411	$	3,097,219

Note 3 – Billings in Excess of Costs

Billings in excess of costs, or costs in excess of billings, relates to research and development contracts and consists of billings at provisional contract rates compared to actual costs plus fees.

Note 4 – Intangible Assets

Intangible assets at March 31, 2011 and September 30, 2010 consist of the following:

	Useful		Gross		Accumulated
March 31, 2011	Life (years)		Amount		Amortization
Acquired Customer Base		5-15	$	7,025,413	$	1,341,824
Know How		15		512,000		93,867
Trade Names		15		219,000		40,150
Backlog		4		182,000		89,833
			$	7,938,413	$	1,565,674

	Useful		Gross		Accumulated
September 30, 2010	Life (years)		Amount		Amortization
Acquired Customer Base		5-15	$	7,025,413	$	1,104,648
Know How		15		512,000		76,800
Trade Names		15		219,000		32,850
Backlog		4		182,000		52,966
			$	7,938,413	$	1,267,264

Amortization expense for the three months ended March 31, 2011 and 2010 was $149,205 and $133,805 respectively. Amortization expense for the six months ended March 31, 2011 and 2010 was $298,410 and $267,610 respectively. Estimated amortization expense for each of the next five fiscal years is as follows:

March 31, 2011	2011 (6 Mos)		2012		2013		2014		2015		2016
Acquired Customer Base		237,177		467,728		463,133		463,133		463,133		463,133
Know How		36,867		55,300		55,300		55,300		55,300		55,300
Trade Names		7,300		14,600		14,600		14,600		14,600		14,600
Backlog		36,867		55,300		0		0		0		0
	$	318,210	$	592,928	$	533,033	$	533,033	$	533,033	$	533,033

Note 5 – Goodwill

During the three and six months ended March 31, 2011 the following changes were made to goodwill:

On July 19, 2010, Dynasil completed the acquisition of 100% of the issued and outstanding common stock of Hilger Crystals Limited from Newport Corporation. The purchase price was composed of $4 million in cash and a possible additional payment of up to $750,000 (contingent consideration) after eighteen months based on Hilger’s business revenues for the eighteen months following the acquisition. The Company has reassessed the expectations regarding the revenue during the eighteen month period based on six months of actual revenues and the forthcoming twelve months of the period. As a result, the Company has lowered the estimate for the contingent consideration payment to $279,600 from the original $750,000. Goodwill was reduced by $470,400 as was the recorded liability, which is now carried as a current liability.

The Company also reassessed the initial carrying valuations of the property and equipment acquired in the Hilger acquisition. As a result, Property, Plant and Equipment was reduced by $25,495 and Goodwill was increased by the same amount.

Note 6 – Earnings Per Common Share

Basic earnings per common share is computed by dividing the net income applicable to common shares after preferred dividends paid, if applicable, by the weighted average number of common shares outstanding during each period. Diluted earnings per common share adjusts basic earnings per share for the effects of common stock options, common stock warrants, convertible preferred stock and other potential dilutive common shares outstanding during the periods.

For purposes of computing diluted earnings per share, 535,619 and 2,337,380 common share equivalents were assumed to be outstanding for the six months ended March 31, 2011 and 2010, respectively. The Series C Preferred Stock was converted to common stock on December 21, 2010 thus is not part of the calculations for the quarter ended March 31, 2011. The computation of the weighted shares outstanding for the three months ended March 31 is as follows:

Weighted average shares outstanding	March 31, 2011		March 31, 2010
Basic		13,975,906		12,146,499
Effect of dilutive securities
Stock Options		535,619		234,980
Convertible Preferred Stock		-0-		2,102,400
Dilutive Average Shares Outstanding		14,511,525		14,483,879

Note 7 - Stock Based Compensation

The fair value of the stock options granted was estimated at the date of grant using the Black-Scholes options pricing model. Based on the list of assumptions presented below with numbers shown for the most recent grant, the weighted average fair value of the options granted during the six months ended March 31, 2011 is $1.62 per share. No stock options were granted in the three months ended March 31, 2011.

	December 2, 2010 (Date of most recent grant)
Expected term in years	3 years
Risk-free interest rate		3.95	%
Expected volatility		85.21	%
Expected dividend yield		0.00	%

The expected volatility was determined with reference to the historical volatility of the Company's stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted represents the period of time that the options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury rate in effect at the time of grant.

During the three months ended March 31, 2011, no stock options were granted and 390,645 stock options were exercised. All of the stock options were exercised via a net exercise arrangement with a weighted average exercise price of $3.03. The total number of shares issued from these net exercises was 163,661, with $11 paid in cash and the remaining exercise cost of $1,183,468 paid through a reduction in the number of shares of common stock issued by 226,984 shares. During the three months ended March 31, 2011, 6,471 options were cancelled, with a weighted average exercise price of $3.58. For the three months ended March 31, 2011, total stock-based compensation charged to operations for option-based arrangements amounted to $14,529. Additionally, during the three months ended March 31, 2011, 1,000 shares of unvested restricted stock were issued with a deferred compensation value of $4,860, half of which vests in 2012 and the remainder in 2013, at which time the compensation expense will be recognized. Also, during the three months ended March 31, 2011, 54,283 shares were granted as compensation, with a total cost of $255,969. Of those shares, 51,783 were director compensation totaling $245,995 which will be expensed over the time period of March, 2011 through January, 2012.

During the six months ended March 31, 2011, 69,802 stock options were granted with prices ranging from $5.53 to $7.32 per share with a value of $113,058, of which $67,307 vested when granted. Of the options granted, 30,000 of the options cannot be exercised until 2012, therefore, the stock-based compensation expense of $45,751 will be recognized in 2012. Additionally, 6,051 previously granted options vested this period. During the six months ended March 31, 2011, 28,357 of the stock options granted were immediately exercisable and 41,445 of previously granted stock options became exercisable, therefore, stock-based compensation expense of $73,358 was recognized during the six months ended March 31, 2011. Of the options exercised in the period, 20,000 had an exercise price of $2.00 per share with $40,000 paid in cash. The remaining 390,645 options exercised had a weighted average exercise price of $3.03 per share with $1,183,468 paid through a reduction in the number of shares of common stock issued by 226,984 shares and $11 paid in cash. During the six months ended March 31, 2011, 26,471 unvested options were cancelled, with a weighted average exercise price of $2.13. Additionally, during the six months ended March 31, 2011, 3,000 shares of unvested restricted stock were issued with deferred compensation values of $14,860. The stock compensation expense for these shares will be recognized when the shares vest in 2012 and 2013. Also, 58,224 shares were granted as compensation, with a total cost of $273,468. Of those shares, 51,783 were director compensation which will be expensed over the time period of March, 2011 through January, 2012. For the six months ended March 31, 2011, total stock-based compensation charged to operations for option-based arrangements amounted to $306,965.

At March 31, 2011, there was approximately $263,695 of total unrecognized compensation expense related to non-exercisable option-based compensation arrangements under the Plan.

Note 8 - Equity

On December 21, 2010, Dynasil issued an aggregate of 2,102,400 shares of its Common Stock, $.0005 par value per share, as a result of the mandatory conversion on that date of 5,256,000 shares of its Series C 10% Cumulative Convertible Preferred Stock (the "Series C Preferred Shares") at a conversion price of $2.50 per share. Dynasil had previously given notice of the mandatory conversion of all of the Series C Preferred Shares on October 22, 2010. 100% of the Series C preferred stock was converted to common stock which eliminates dividend payments of $525,600 on an annual basis. The Company’s convertible preferred stock, when issued, was convertible to common stock at or above the then current market price of the Company’s common stock and therefore, contained no beneficial conversion feature. Dividends on the Series C Preferred Shares were payable quarterly in cash or common stock at the election of the stockholder. There is currently no outstanding preferred stock.

Note 9 – Segment, Customer and Geographical Reporting

Segment Financial Information

Dynasil’s business breaks down into two segments: optics/photonics products and instruments and contract research. Within these segments, there is a segregation of reportable units based upon the organizational structure used to evaluate performance and make decisions on resource allocation, as well as availability and materiality of separate financial results consistent with that structure. The optics/photonics products and instruments segment manufactures optical materials, components, coatings and specialized instruments used in various applications in the medical, industrial, and homeland security/defense sectors. Our contract research segment is one of the largest small business participants in U.S. government-funded research. The Company’s segment information is summarized below:

	Six Months Ended
	March, 31			March, 31
Segment	2011			2010
Contract Research
Revenue	$	12,455,923		$	11,621,992
Income from Operations		427,108			846,527
Income as a percent of revenue		3.4	%		7.3	%
Photonics Products and Instruments
Revenue	$	11,286,933		$	8,578,100
Income from Operations		1,125,465			1,334,431
Income as a percent of revenue		10	%		15.6	%
Total
Revenue	$	23,742,856		$	20,200,092
Income from Operations		1,552,573			2,180,958
Income as a percent of revenue		6.5	%		10.8	%

Goodwill
Contract Research	$	4,754,825		$	4,754,825
Photonics Products and Instruments	$	8,391,557		$	6,299,571

Customer Financial Information

For the three months ended March 31, 2011, the top three customers for the Contract Research segment were each various agencies of the U.S. Government. For the three months ended March 31, 2011, these customers made up 77% of Contract Research revenue. For the six months ended March 31, 2011, the top three customers for the Contract Research segment were each various agencies of the U.S. Government. For the six months ended March 31, 2011, these customers made up 77% of Contract Research revenue.

For the Products and Instruments segment, there was no customer whose revenue represented more than 10% of the total segment revenue for the three months or the six months ended March 31, 2011.

Geographic Financial Information

Revenue by geographic location in total and as a percentage of total revenue, for the three months ended March 31, 2011 and 2010 are as follows:

	Three Months Ended					Three Months Ended
	March 31, 2011					March 31, 2010
Geographic Location	Revenue		% of Total			Revenue		% of Total
United States	$	10,152,116		83.8	%	$	8,980,613		87.5	%
Europe		1,114,272		9.2	%		707,381		6.9	%
Other		849,961		7.0	%		575,332		5.6	%
	$	12,116,349		100.0	%	$	10,263,326		100.0	%

Revenue by geographic location in total and as a percentage of total revenue, for the six months ended March 31, 2011 and 2010 are as follows:

	Six Months Ended					Six Months Ended
	March 31, 2011					March 31, 2010
Geographic Location	Revenue		% of Total			Revenue		% of Total
United States	$	19,557,753		82.4	%	$	17,044,667		84.4	%
Europe		2,628,558		11.1	%		1,457,026		7.2	%
Other		1,556,545		6.6	%		1,698,399		8.4	%
	$	23,742,856		100.0	%	$	20,200,092		100.0	%

Note 10 – Business Acquisition – Hilger Crystals, Ltd.

On July 19, 2010, Dynasil completed the acquisition of 100% of the issued and outstanding common stock of Hilger Crystals Limited from Newport Corporation (“Newport”). Hilger, located in Margate, Kent, England, is engaged in the manufacture of synthetic crystals, detectors and arrays for infrared spectroscopy and x-ray and gamma ray detection.

The following is the comparative financial information of the Company for the six months ended March 31, 2011 and the proforma financial information for the six months ended March 31, 2010, assuming the transaction had been consummated at the beginning of the year (i.e., October 1, 2009.)

	For the six months ended March 31, 2011		For the six months ended March 31, 2010
	(Unaudited)		(Unaudited)
Statement of Operations:
Revenue	$	23,742,856	$	21,490,014
Cost of revenue		14,120,300		12,824,231
Gross profit		9,622,556		8,665,783
Operating Expense		8,069,983		6,570,274
Income from operations		1,552,573		2,095,509
Interest expense, net		313,352		312,555
Income before taxes		1,239,221		1,782,954
Income taxes		467,823		676,630
Net Income	$	771,398	$	1,106,324

Earnings per share:
Basic	$	0.06	$	0.09
Diluted	$	0.05	$	0.08

Note 11 - Income Taxes

Dynasil Corporation of America and its wholly-owned subsidiaries file a consolidated federal income tax return.

The Company uses the asset and liability approach to account for income taxes. Under this approach, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and net operating loss and tax credit carryforwards. The amount of deferred taxes on these temporary differences is determined using the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, as applicable, based on tax rates, and tax laws, in the respective tax jurisdiction then in effect. Valuation allowances are provided if it is more likely than not that some or all of the deferred tax assets will not be realized. The provision for income taxes includes taxes currently payable, if any, plus the net change during the year in deferred tax assets and liabilities recorded by the Company.

The Company applies the authoritative provisions related to accounting for uncertainty in income taxes. As required by these provisions, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company has applied these provisions to all tax positions for which the statute of limitations remained open. There was no impact on the Company’s consolidated financial position, results of operations, or cash flows as of March 31, 2011 and 2010. As of March 31, 2011 and 2010, the Company had no unrecognized tax benefits. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of March 31, 2011 and 2010, the Company had no accrued interest or penalties related to income taxes. The Company currently has no federal or state tax examinations in progress. The Company’s tax filings for federal and state jurisdictions for the years 2007 to 2010 are still subject to examination.

Note 12 – Subsequent Events

On April 1, 2011, the Loan and Security Agreement with Sovereign Bank was amended. See the Company's report on form 8-K filed on July 14, 2010 for additional details on the original Loan and security Agreement. See the Liquidity and Capital Resource section of Item 2: Management Discussion and Analysis for further details on the Amendment.

On April 14, 2011, Dynasil announced the incorporation of Dynasil Biomedical to pursue opportunities in the biomedical field, the hiring of Dr. Daniel Ericson as Scientific Lead, and the acquisition of Dr. Ericson’s rights to six biomedical technologies invented or co-invented by him. See the Commercialization and Acquisition section of Item 2: Management Discussion and Analysis for further details.

On April 19, 2011, Dynasil announced that the Board of Directors has appointed Steven K. Ruggieri the new President, effective May 17, 2011, to succeed Craig T. Dunham. See the General Business Overview section of Item 2: Management Discussion and Analysis for further details.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management's discussion and analysis should be read in conjunction with our financial statements and the notes thereto in the Dynasil Corporation of America ("Dynasil", the "Company" or "we") Form 10-K for the fiscal year ending September 30, 2010.

General Business Overview

Revenue for the second quarter of fiscal year 2011 which ended March 31, 2011 rose to a record level once again of $12.1 million, an increase of 18% over revenue of $10.3 million for the quarter ended March 31, 2010. Income from Operations for the quarter was $816,858 as compared to $1.11 million for the quarter ended March 31, 2010. Similarly, Income before Taxes for the quarter was $661,701, down $295,435 from the prior year quarter ended March 31, 2010. Net Income for the quarter was $396,216 or $0.03 per share, compared with Net Income of $633,300 or $0.04 per share, for the quarter ended March 31, 2010. Total business unit profitability before corporate costs increased over fiscal year 2010 and those gains were offset by our corporate level spending on growth- related initiatives and transition expenses associated with the upcoming departure of our current President and CEO, Craig T. Dunham. Acquisitions and commercialization of technology from our extensive R&D portfolio are expected to be key drivers of our future growth and we plan to continue to invest in these growth drivers.

For the three months ended March 31, 2011, our Contract Research segment (“Contract Research”) revenue increased 9.5%. Major customers such as Homeland Security and Department of Energy continue to demonstrate strong interest in our ongoing research work. The backlog of total business exceeds one and one half years. Our Optics/Photonics Products and Instruments segment (“Products and Instruments”) had revenue growth of 29.3% overall, including Hilger and 9.1% excluding the acquisition. Our operations continue to benefit from an improving economic environment and our internal growth initiatives.

On April 19, 2011, the Company announced that the Board of Directors has appointed Steven K. Ruggieri the new President, effective May 17, 2011, to succeed Craig T. Dunham. As announced in December of 2010, Mr. Dunham is retiring from his executive position but will remain a member of Dynasil’s Board of Directors. Mr. Ruggieri has more than 32 years of business leadership experience in the research, defense, security and technology markets working at Foster Miller and successor company, Qinetiq Group North America. He led business operations for Qinetiq North America’s Technology Solutions Group for parent Qinetiq Group PLC, a $2.5 billion public UK company. The Technology Solutions Group was formed through the 2004 acquisition and integration of Foster-Miller, an R&D and product innovation company. Following the acquisition, under his leadership, revenue grew from $120 to $400 million in five years.

Results of Operations

	Results of Operations for the Three Months Ended March 31,
	2011						2010
	Contract Research		Products & Instruments		Total		Contract Research		Products & Instruments		Total
	Contract Research		Products & Instruments		Total		Contract Research		Products & Instruments		Total
Revenue		6,388,804		5,727,545		12,116,349		5,834,408		4,428,918		10,263,326
Gross Profit		2,291,936		2,423,895		4,715,831		2,431,216		1,777,263		4,208,479
SG&A		2,057,774		1,841,199		3,898,973		1,983,403		1,115,952		3,099,355
Operating Income		234,162		582,696		816,858		447,813		661,311		1,109,124

Revenue for the three months ended March 31, 2011 was $12,116,349, an 18.1% increase from $10,263,326 for the three months ended March 31, 2010. Contract Research revenue increased by 9.5%. Our Products and Instruments segment had revenue growth of 29.3% overall, including Hilger, and 9.1% excluding the acquisition. The Contract Research segment revenue was driven by increased research work for U.S. Government agencies while the Products and Instruments segment benefited from the continuing improvement in the economy, coupled with our internal growth initiatives.

Gross Profit for the three months ended March 31, 2011 was $4,715,831, or 38.9% of sales, a 12.1% increase from $4,208,479, or 41.0% of sales for the three months ended March 31, 2010. Both business segments experienced similar increases in Cost of Goods Sold as a percent of Sales. The Contract Research segment had higher labor costs and the Products and Instruments segment had slightly higher materials and labor costs.

Selling, general, and administrative (“SG&A”) expenses for the three months ended March 31, 2011 were $3,898,973 or 32.2% of sales. This was an increase 2.0% of sales from SG&A expenses of $3,099,355 or 30.2% of sales for the three months ended March 31, 2010. Higher SG&A costs came primarily from higher corporate costs and the addition of Hilger. Included here were executive recruiter expenses, legal costs for Steve Ruggieri’s employment documents and accruals for severance associated with the planned departure of Craig Dunham, President and CEO.

Income from Operations for the three months ended March 31, 2011 was $816,858, a decrease of $295,435 from the prior year comparable period. As a percent of sales, the current quarter was 6.7% compared to 10.8% in 2010. Prior to corporate costs and the expenses associated with our Dual Mode Detector business start-up, Product and Instruments Segment Income from Operations was up 12% from the three months ended March 31, 2010. The Contract Research segment was especially impacted by the higher corporate costs since a portion of the higher SG&A costs were considered “unallowable” expenses under government contracts.

Net interest expense for the three months ended March 31, 2011 was $155,157, compared to $151,988 for the three months ended March 31, 2010. Lower interest rates offset the effect of the higher debt levels. Debt levels are higher at March 31, 2011, as a result of the borrowings to fund the Hilger acquisition in July, 2010.

Net Income for the three months ended March 31, 2011 was $396,216, or $0.03 in basic earnings per share compared to $633,300 or $0.04 in basic earnings per share for the quarter ended March 31, 2010.

The Company had a $265,485 provision for income taxes for the quarter ended March 31, 2011 and a $323,836 provision for the quarter ended March 31, 2010.

Results of Operations – Year to Date

	Results of Operations for the Six Months Ended March 31,
	2011						2010
	Contract Research		Products & Instruments		Total		Contract Research		Products & Instruments		Total
	Contract Research		Products & Instruments		Total		Contract Research		Products & Instruments		Total
Revenue		12,455,923		11,286,933		23,742,856		11,621,992		8,578,100		20,200,092
Gross Profit		4,824,145		4,798,411		9,622,556		4,626,527		3,466,765		8,093,292
SG&A		4,397,037		3,672,946		8,069,983		3,780,000		2,132,334		5,912,334
Operating Income		427,108		1,125,465		1,552,573		846,527		1,334,431		2,180,958

Revenue for the six months ended March 31, 2011 was $23,742,856, an increase of 17.5% over revenue of $20,200,092 for the six months ended March 31, 2010. Contract Research revenue rose 7.2%. Major customers, such as Homeland Security and Department of Energy, continue to demonstrate strong interest in our ongoing research work. Recently, the Company’s research division, Radiation Monitoring Devices, Inc. (“RMD”) was named a 2011 Department of Homeland Security (DHS) small business winner for radiation and nuclear detection. This award is one of DHS’s small business awards for innovative achievement and commitment to national security. Our Products and Instruments segment had year to date revenue growth of 31.6% overall including Hilger, and 10.9% excluding the acquisition.

Gross profit for the six months ended March 31, 2011 was $9,622,556, or 40.5% of sales, an 18.9% increase from $8,093,292, or 40.1% of sales, for the six months ended March 31, 2010. Both business segments showed similar increases in their gross margin percentage.

SG&A expenses for the six months ended March 31, 2011 were $8,069,983 or 34.0% of sales. This was a large increase from SG&A expenses of $5,912,334 or 29.3% of sales for the six months ended March 31, 2010. First quarter SG&A expenses included the full costs of the successful application and registration for Dynasil’s stock listing on NASDAQ. The costs, including legal assistance were nearly $160,000. Future benefits to stockholders from the NASDAQ listing are expected to include greater visibility for the Company and greater liquidity for the stock. Also included in SG&A expenses for the three months ended December 31, 2010 were the costs associated with the search, investigation and due diligence efforts toward various acquisition opportunities. Substantial legal costs were included in the recorded total costs of at least $180,000. Second quarter SG&A expenses included executive recruiter expenses, legal costs for Steve Ruggieri’s employment documents and accrued severance for the planned departure of Craig Dunham, President and CEO, in the amount of $156,000. Also included in the SG&A costs were legal and consulting expenses of $54,000 associated with our new operation in Minnesota – Dynasil Biomedical Corp. Both business segments shared in these unusual and high SG&A costs which occurred at the corporate level.

Income from operations for the six months ended March 31, 2011 was $1,552,573. This was a decrease of $628,385 from the comparable six month period ended March 31, 2010. As a percent of sales, the current year was 6.5% compared to 10.8% in 2010. Both business segments reported lower Income from Operations as the result of growth-related and President transition spending at the corporate level. Prior to corporate costs and the expenses associated with our Dual Mode Detector business start-up, Product and Instruments Segment Income from Operations was up 33% from the six months ended March 31, 2010. Contract Research results were impacted because a portion of the higher SG&A costs were considered “unallowable” under government contracts.

Net interest expense for the six months ended March 31, 2011 was $313,352, compared to $314,429 for the six months ended March 31, 2010. Interest expense is lower despite the total debt increasing to $11,774,042 from $8,974,306 at March 31, 2010. The decrease in interest expense is the result of the debt refinancing in July, 2010 at a substantially reduced interest rate. The increase in debt is the result of the borrowings to fund the Hilger acquisition in July 2010.

The Company had a $467,823 provision for income taxes for the six month period ended March 31, 2011 and a $619,462 provision for the comparable period ended March 31, 2010.

Net Income for the six months ended March 31, 2011 was $771,398, or $0.06 in basic earnings per share compared to $1,247,067 or $0.08 in basic earnings per share for the comparable period ended March 31, 2010. The approximately $550,000 of unusual and high SG&A expenses reduced earnings per share by $0.02.

Liquidity and Capital Resources

Cash increased by $217,695 for the six months ended March 31, 2011 to $4,329,661. The primary sources of cash were net income of $771,398, non cash stock compensation expense of $306,965 and depreciation and amortization of $642,368. These items totaled $1,720,731. In addition, our Contract Research segment provided $693,267 as a result of billings in excess of costs by billing customers at provisional contract rates while actual rates have been lower. Accounts Receivable increased by $1,068,861 for the six months ended March 31, 2011. Days Sales Outstanding (DSO) increased to 53.1 days from 51.8 days, with the Hilger acquisition causing the greatest change. Therefore, our Products and Instruments segment experienced the larger increase from 56.5 days to 63.5 days. Inventories have increased by $268,192 in the Products and Instruments segment. Inventory turns have fallen slightly to 3.8 turns from 4.0 turns at September 30, 2010, primarily due to the impact of the Hilger acquisition. In total, net cash provided by operating activities was $1,491,246. Cash used for the purchase of property, plant and equipment was $698,104, including investment relating to our new dual mode detector product line. Payments on long term debt were $930,071 as part of regular scheduled payments to Sovereign Bank under the five year Term Debt and Acquisition Line of Credit. Finally, common stock issuance provided $110,505 and $79,770 was paid in cash for preferred stock dividends.

Management believes that its current cash and cash equivalent balances, along with the net cash generated by operations and credit lines, are sufficient to meet its anticipated cash needs for working capital for at least the next twelve months. As of March 31, 2011, the Company had cash of $4,329,661 and available bank line of credit borrowings of $4 million, made up of $3 million available under a working capital line of credit and an additional $1 million remaining available under an acquisition line of credit. From July 1, 2010 until June 30, 2012, the former owners of RMD Instruments, LLC may tender to the Company up to 1,000,000 shares of Dynasil common stock at a repurchase price of $2.00 per share which could require the Company to make cash payments of up to $2.0 million.

On April 1, 2011, the Company amended its Loan and Security Agreement dated July 7, 2010 with Sovereign Bank by executing the Amendment No. 1 To Loan and Security Agreement (“Amendment”) . The amendment addresses changes to its covenant calculations. This amendment provides the Company with greater flexibility to invest in strategic growth initiatives, which may require capital expenditures or acquisition-related costs. The specific changes from the amendment are as follows: (1) The definition of “Consolidated EBITDA” was amended to now include the aggregate reasonable transaction costs and expense incurred in connection with the consummation of any Permitted Acquisition as an add back. (2) Unfunded Capital Expenditures shall not exceed $2.0 million in fiscal year 2011 and shall not exceed $1.7 million in any subsequent fiscal year. (3) The Company shall maintain minimum cash balances with Sovereign Bank of not less than $1.0 million. (4) The definition of Consolidated Fixed Charges was amended to exclude Unfunded Capital Expenditures. The definition now reads: “Consolidated Fixed Charges” shall mean with respect to Borrower and its Subsidiaries on a consolidated basis, without duplication, for any fiscal measurement period, the sum of (a) the cash Interest Expense for such period, plus (b) the aggregate principal amount of scheduled payments on any Indebtedness of Borrower or any Subsidiary (including without limitation all Capital Lease Obligations and the Loans) made during such period. All other terms and conditions of the Loan and Security Agreement remain unchanged.

The Sovereign Bank Loan Agreement also contains other terms, conditions and provisions that are customary for commercial lending transactions of this sort. The Bank Loan Agreement requires Dynasil to maintain compliance at all times and report at the end of each fiscal quarter a Consolidated Maximum Leverage Ratio (Total Funded Debt to EBITDA, as defined in the Bank Loan Agreement) not to exceed 3 to 1 and a Fixed Charge Coverage Ratio of at least 1.2 to 1. The Bank Loan Agreement also provides for events of default customary for credit facilities of this type, including, but not limited to, non-payment, breach of covenants, insolvency and defaults on other debt.

The Company was in compliance with all covenants under the Sovereign Bank Loan Agreement at March 31, 2011 and would also have been in compliance with all covenants under the terms of the Sovereign Bank Loan Agreement April 1, 2011 amendment. We believe that the Company will remain in compliance and maintain access to the Bank lines of credit. However, this belief is based upon many assumptions including the general business climate. A reoccurring worldwide economic slow-down could significantly impact the Company’s revenues and profits so that a returning recession could cause a cash shortage.

Acquisitions and Commercialization of Research

We continue to execute our strategy of significant growth through acquisitions and commercialization of our technology from our government funded research. During the last twelve months, Dynasil implemented key initiatives to support the success of our commercialization strategy of our RMD Research technology pipeline by increasing investment into our dual mode nuclear detector program for Homeland Security applications and by acquiring Hilger Crystals, Ltd., a leading manufacturer of synthetic crystals that are applicable to a wide range of our industrial, medical and homeland security applications. By combining our technical depth in synthetic crystal’s with Hilger’s highly specialized expertise in the growth and manufacture of crystals, our objective is to accelerate the commercialization and distribution of our extensive technology portfolio. The dual mode detectors are planned for use in locating nuclear bombs or nuclear materials at ports and borders which is of critical importance to our national security, as well as other radiation detection applications, such as nuclear power plants. They are designed to be a single detector which replaces two current detector subsystems – the gamma radiation detector and also the Helium-3 detectors for neutrons which are in critically short supply. Handheld devices are the initial target market and we made significant progress during the second quarter developing commercial relationships with lead customers. On March 23, 2011, we announced that our RMD Research unit had expanded its patent protection over its dual mode radiation detection technology with the approval of additional patent claims that cover methods of detecting both neutron and gamma radiation using RMD's proprietary scintillator compositions. That patent reinforces RMD's earlier patent which provides other protection relating to various scintillator compositions and detectors. RMD has a number of additional patent applications pending which cover other aspects of detection technology and expects to secure a broad range of patent protection in this area. To make this advanced detector technology available to the homeland security and commercial radiation detection markets as quickly as possible, Dynasil concurrently developed specialized production furnaces designed to make the crystals in large volumes. We also announced on March 23, 2011 that the initial furnaces had been deployed at our Hilger location and that additional capacity is expected to be placed into service over the next several months. We expect to be in full production mode for the new dual mode detector product line during this fiscal year. On April 20, RMD Research was named a 2011 Department of Homeland Security (DHS)’s small business winner for radiation and nuclear detection, which related to the dual mode detector development program as well as results on other radiation detection projects. According to the Civitas Group 2007 Radiation and Radiological Security Market Report, the market for radiation detection instruments is approximately $300 million on an annual basis.

Management is focused on commercialization of RMD technology either internally or through acquisitions. The Hilger acquisition exemplifies our growth strategy to acquire companies with strengths in complementary areas, which enables us to more quickly commercialize our new technology while expanding the scale and scope of our product lines and distribution channels. The following additional technology areas are under active consideration for commercial expansion, acquisitions, possible licensing or possible joint venture activities. Compact, low cost radiation badges are under development for potential military, industrial and consumer applications which also may have high potential. The project has been funded by the Department of Defense into Phase 3 where we have partially completed shipments of 150 prototypes being built for evaluation. The Company is researching the marketability of this potential product and according to Introductory Profile 2010 on dosimetryimaging.com, the total dosimeter market size is currently about $500 million. Another active project is sensors for non-destructive testing which can detect very small cracks for applications such as aircraft wings, turbine blades, nuclear power plant piping and other non-destructive testing of metals. This is a large world-wide industry for which RMD Research is working to develop a product with a greatly enhanced capability to detect cracks at the micro level. When fully developed, this technology could dramatically improve the outcomes in this industry. During the first half of the current fiscal year, prototypes were provided to a potential lead customer and we expect to finalize a supply agreement for additional prototype quantities during quarter 3. Another area of commercialization activity is new thin film coatings for medical imaging applications. RMD Research has developed coatings which enable higher speed x-ray imaging as well as highly sensitive PET sensors used for medical diagnostic procedures. According to the PET/SPECT Report dated November 10, 2010 from the firm Markets and Markets, the market for PET/SPECT imaging systems is expected to grow from $6.8 billion in 2010 to $10.3 billion in 2015. We currently sell low volume quantities of these coatings and sensors and are evaluating the market potential. Medical testing instruments are another area of active research. For example, we have research funding for an instrument to provide early warning for shock. According to GBI Research, the multi-parametric critical-care monitor market exceeds $3 billion per year.

Acquisition activities continued during the second quarter as we drive for future growth. On April 14, 2011, we announced the incorporation of Dynasil Biomedical Corp. as a new business unit to pursue opportunities in the biomedical field. It is located in Rochester, Minnesota and Dr. Daniel Ericson joined Dynasil Biomedical as Scientific Lead with responsibility for research and development. Dynasil Biomedical completed the purchase of Dr. Ericson’s rights to six biomedical technologies invented or co-invented by him for a purchase price of $300,000, together with certain rights to royalty and milestone payments if these technologies are successfully developed. Dr. Ericson previously worked at Mayo Clinic and several of the assigned technologies are jointly owned with that institution. Additionally, he previously invented several medical technologies which are in commercial use or being developed for commercial use by unrelated parties. The six purchased technology rights include a method that could significantly extend the storage time for red blood cells as well as enhancing the quality of those cells, a tuberculosis test with the potential to provide a rapid (one hour) test, a tissue sealant developed for both topical and internal bleeding which could accelerate clot formation and have high tensile strength, and a set of technologies focused on point of care diagnostics for assessing hemophilia, blood coagulation and cardiovascular risk. The point of care tests use finger stick blood samples and handheld optical detection systems. While Dynasil currently believes that these technologies represent exciting opportunities, the technologies are all early stage and there can be no assurances that any of these technologies will be successfully commercialized. Dynasil Biomedical will collaborate with Dynasil’s RMD Research organization and its RMD Instruments business, both of which have proven track records in medical diagnostics. Government grants under the SBIR program are being pursued. We view the medical diagnostics market as a key area for continued investment where Dynasil can contribute its significant ability and expertise to make the world a safer and healthier place. Financial results for our Dynasil Biomedical Corp. initiative will be reported within our Contract Research segment.

Critical Accounting Policies and Estimates

There have been no material changes in our critical accounting policies or critical accounting estimates since September 30, 2010. We have not adopted any accounting policies since September 30, 2010 that have or will have a material impact on our consolidated financial statements. For further discussion of our accounting policies see the “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010 as well as the notes in this Form 10-Q.

The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

Revenue Recognition

Revenue from sales of products is recognized at the time title and the risks and rewards of ownership pass. This is when the products are shipped per customers’ instructions, the sales price is fixed and determinable, and collections are reasonably assured. Revenue from research and development activities consists of up-front fees, research and development funding and milestone payments. Periodic payments for research and development activities and government grants are recognized over the period that the Company performs the related activities under the terms of the agreements.

Government funded services revenues from cost plus contracts are recognized as costs are incurred on the basis of direct costs plus allowable indirect costs and an allocable portion of the contracts’ fixed fees. Revenue from fixed-type contracts is recognized under the percentage of completion method with estimated costs and profits included in contract revenue as work is performed. Revenues from time and materials contracts are recognized as costs are incurred at amounts represented by agreed billing amounts. Recognition of losses on projects is taken as soon as the loss is reasonably determinable. The Company has no current accrual provision for potential losses on existing research projects based on Management expectations as well as historical experience.

The majority of the Company’s contract research revenue is derived from the United States government and government related contracts. Such contracts have certain risks which include dependence on future appropriations and administrative allotment of funds and changes in government policies. Costs incurred under United States government contracts are subject to audit. The Company believes that the results of such audits will not have a material adverse effect on its financial position or its results of operations.

Valuation of Long-Lived Assets, Intangible Assets and Goodwill

Goodwill

Goodwill and intangible assets which have indefinite lives are subject to annual impairment tests. We test goodwill by reviewing the carrying value compared to the fair value at the reporting unit level. Fair value for the reporting unit is derived using the income approach. Under the income approach, fair value is calculated based on the present value of estimated future cash flows. Assumptions by management are necessary to evaluate the impact of operating and economic changes and to estimate future cash flows. Our evaluation includes assumptions on future growth rates and cost of capital that are consistent with internal projections and operating plans.

The Company generally performs its annual impairment testing of goodwill during the fourth quarter of its fiscal year, or more frequently if events or changes in circumstances indicate that the assets might be impaired. The Company tests impairment at the reporting unit level using the two-step process. The Company’s primary reporting units tested for impairment are RMD Research, which comprises our Contract Research segment and RMD Instruments, which is a component of our Optics/Photonic Products and Instruments segment.

Step one of our impairment testing compares the carrying value of a reporting unit to its fair value. The carrying value represents the net book value of the net assets of the reporting unit or simply the equity of the reporting unit if the reporting unit is the entire entity. If the fair value of the reporting unit is greater than its carrying value, no impairment has been incurred and no further testing or analysis is necessary. The Company estimates fair value using a discounted cash flow methodology which calculates fair value based on the present value of estimated future cash flows. Estimating future cash flows requires significant judgment and includes making assumptions about projected growth rates, industry-specific factors, working capital requirements, weighted average cost of capital, and current and anticipated operating conditions. Assumptions by management are necessary to evaluate the impact of operating and economic changes. The Company’s evaluation includes assumptions on future growth rates and cost of capital that are consistent with internal projections and operating plans. The use of different assumptions or estimates for future cash flows could produce different results. The Company regularly assesses the estimates based on the actual performance of our reporting units.

If the carrying value of a reporting unit is greater than its fair value, step two of the impairment testing process is performed to determine the amount of impairment to be recognized. Step two requires the Company to estimate an implied fair value of the reporting unit’s goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill. An impairment then exists if the carrying value of the goodwill is greater than the goodwill’s implied fair value. With respect to the Company’s annual goodwill impairment testing performed during the fourth quarter of fiscal year 2010, step one of the testing determined the estimated fair values of the reporting units substantially exceeded their carrying values by 20%. Accordingly, the Company concluded that no impairment had occurred and no further testing was necessary.

Intangible Assets

The Company’s intangible assets consist of an acquired customer base of Optometrics, LLC, acquired customer relationships and trade names of RMD Instruments, LLC, and acquired backlog and know how of RMD, Inc. The Company amortizes its intangible assets with definitive lives over their useful lives, which range from 4 to 15 years, based on the time period the Company expects to receive the economic benefit from these assets. No impairment charge was recorded during the periods ended March 31, 2011 and September 30, 2010.

Impairment of Long-Lived Assets

The Company’s long-lived assets include property, plant and equipment and intangible assets subject to amortization. The Company evaluates long-lived assets for recoverability whenever events or changes in circumstances indicate that an asset may have been impaired. In evaluating an asset for recoverability, the Company estimates the future cash flow expected to result from the use of the asset and eventual disposition. If the expected future undiscounted cash flow is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair value of the asset, is recognized. As a result, the Company reviewed its long-lived assets and determined there was no impairment charge during the periods ended March 31, 2011 and September 30, 2010.

Estimating Allowances for Doubtful Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been minimal, within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of any of our significant customers could have a material adverse effect on the collectability of our accounts receivable and our future operating results.

Convertible Preferred Stock

The Company considers the guidance of EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments”, codified in FASB ASC Topic 470-20 when accounting for the issuance of convertible preferred stock. The Company’s convertible preferred stock, when issued, are generally convertible to common stock at or above the then current market price of the Company’s common stock and therefore, will contain no beneficial conversion feature. The Company currently has no convertible preferred stock outstanding.

Stock-Based Compensation

We account for stock-based compensation using fair value. Compensation costs are recognized for stock options granted to employees and directors. Options and warrants granted to employees and non-employees are recorded as an expense at the date of grant based on the then estimated fair value of the security in question, determined using the Black-Scholes option pricing model.

Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax provision (benefit) in each of the jurisdictions in which we operate. This process involves estimating our current income tax provision (benefit) together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We regularly evaluate our ability to recover the reported amount of our deferred income taxes considering several factors, including our estimate of the likelihood of the Company generating sufficient taxable income in future years during the period over which temporary differences reverse.

RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2010, the FASB issued Accounting Standards Update No. 2010-20 (ASU 2010-20), Receivables (Topic 310) — Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 requires disclosures about the nature of the credit risk in an entity’s financing receivables, how that risk is incorporated into the allowance for credit losses, and the reasons for any changes in the allowance. Disclosure is required to be disaggregated at the level at which an entity calculates its allowance for credit losses. ASU 2010-20 was effective for the Company beginning March 31, 2011, but was extended to June 30, 2011 per ASU 2011-01. The adoption of this accounting standard is not expected to have a material impact on our financial position, results of operations, cash flows and disclosures.

In December 2010, the FASB issued Accounting Standards Update No. 2010-28 (ASU 2010-28), Intangibles—Goodwill and Other (Topic 350), When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this Update modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. ASU 2010-28 is effective for us beginning October 1, 2011 and is not expected to have a material impact on the Company’s financial position, results of operations, cash flows and disclosures.

In December 2010, the FASB issued Accounting Standards Update No. 2010-29 (ASU 2010-29), Business Combinations (Topic 805) — Disclosure of Supplementary Pro Forma Information for Business Combinations. ASU 2010-29 requires a public entity to disclose pro forma information for business combinations that occurred in the current reporting period. The disclosures include pro forma revenue and earnings of the combined business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after October 1, 2011 effective for the Company beginning September 30, 2011. The adoption of this accounting standard is not expected to have a material impact on the Company’s financial position, results of operations, cash flows and disclosures.

Forward-Looking Statements

The statements contained in this Quarterly Report on Form 10-Q which are not historical facts, including, but not limited to, statements about our expectations, beliefs, plans, designs, objectives, prospects, financial condition, assumptions or future events or performance, including, but not limited to, the future markets and demand for our products, new research and development initiatives, our debt covenant compliance, and the Company’s potential repurchase obligation with respect to equity issued in connection with the RMD acquisition are forward-looking statements that involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are the risks and uncertainties discussed in this Quarterly Report on Form 10-Q, including, without limitation, those set forth under Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the risks and uncertainties set forth from time to time in the Company's filings with the Securities and Exchange Commission, and other public statements. Such risks and uncertainties include, without limitation, seasonality, interest in the Company's products, consumer acceptance of new products, general economic conditions, consumer trends, costs and availability of raw materials and management information systems, competition, litigation and the effect of governmental regulation. The Company disclaims any intention or obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk.

Dynasil, as a smaller reporting company, is not required to complete this item.

ITEM 4 Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”)) as of the end of the period covered by this report and have determined that, as of such date, such disclosure controls and procedures are effective.

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with this evaluation that occurred during our last fiscal quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 6 Exhibits

(a) Exhibits and index of Exhibits

10.1

Amendment No. 1 To Loan and Security Agreement

10.2

Employment Letter dated April 13, 2011, between the Company and Steven Ruggieri, filed as Exhibit 10.1 to Form 8-K filed on April 19, 2011 and incorporated herein by reference.

31.1(a)

Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.1(b)

Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Section 1350 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished but not filed for purposes of the Securities Exchange Act of 1934)

99.1

Press release, dated May 16, 2011 issued by Dynasil Corporation of America announcing its financial results for the quarter ended March 31, 2011.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DYNASIL CORPORATION OF AMERICA

BY:	/s/ Craig T. Dunham	DATED: May 16, 2011
	Craig T. Dunham,
	President and CEO


	/s/ Richard A. Johnson	DATED: May 16, 2011
	Richard A. Johnson,
	Chief Financial Officer